Defrauded investors in an investment scheme rarely recover all of the funds that they have invested, and the question of the amount to which each investor is entitled is complicated when the investments are comingled. In Ontario, the courts have determined that the fairest way to distribute the remaining funds of innocent investors caught in a fraudulent investment scheme is by using the lowest intermediate balance rule (“LIBR”). The lowest intermediate balance can be difficult to calculate, and thus the LIBR method is only used when it is practically possible to apply. The LIBR method protects later investors in a fund by preventing them from sharing the burden of losses incurred prior to such investor’s investment and allocates subsequent losses amongst all investors. When it is impossible or extremely difficult to calculate the lowest intermediate balance, the pro-rata method is appropriate.
Legal Background and Greyhawk -
Until recently, the law in Ontario respecting the entitlement of defrauded investors to commingled funds in the event of a shortfall appeared unsettled. This was the result of two ostensibly divergent cases: Ontario (Securities Commission) v. Greymac Credit Corp 1986 CarswellOnt 158 (Ont. C.A.) (“Greymac”) and Law Society of Upper Canada v. Toronto Dominion Bank  3 S.C.R. xiii (S.C.C.) (“Law Society”). A 2013 Ontario Court of Appeal decision affirming the decision of Justice Morawetz in Boughner v. Greyhawk Equity Partners Limited Partnership (Millennium), 2012 CarswellOnt 10466 (Ont. S.C.J.) [Commercial List] (affirmed 2013 CarswellOnt 510 (Ont. C.A.)) (“Greyhawk”) clarified the law and explained that the foregoing cases may be read together and are not contradictory.
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